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Gov’t interference clouding outlook for automakers, says UBS exec

The outlook for the global auto industry is fairly bright, but government interference is clouding the picture in Europe and China, Philippe Houchois, UBS Head of European Automotive Research, told the Automotive News Europe Congress here.

“The industry now looks fairly attractive from a growth perspective,” Houchois said. “Risk management has improved, and growth is structurally higher.”

But governments and lawmakers in Europe are adding costs to the industry without always living up to their part of the bargain, he said. And in China, the government plans to make a decision this year or in 2015 about whether foreign carmakers can buy out their joint venture partners in the world’s biggest car market in what Houchois called “one of the most important themes of the year.”

In Europe, weak commitment by governments on infrastructure spending combined with costly emissions reduction efforts required by EU lawmakers makes CO2 reduction a “negative-sum game” where “more capital is spent on the same number of cars sold,” Houchois said on Wednesday.

New emissions rules that went into effect earlier this year oblige carmakers to cut average car-CO2 emissions to 95 grams a kilometer, the lowest in the world, in 2021 through varying targets for individual manufacturers. The law helps an EU goal to reduce greenhouse gases, which are blamed for global warming, by a fifth in 2020 compared with 1990. CO2 is the main greenhouse gas.

Carmakers are having a particularly difficult time in trimming the weight of their vehicles, he noted, since additional CO2 reduction technology inevitably increases the weight of a car – which in turn increases emissions.

“The rule of thumb in the industry is every 100kg you take off the car [weight] you remove 6 grams of CO2 output. … At this point, this industry needs to remove 300kg to 400kg per car within the next few years, and we’re no where near that situation,” he said.

European governments are also standing in the way of the plant capacity reduction the industry needs to return to profit, he said. European factories are capable of building about 4 million more cars than what will be sold in 2014, according to UBS data. Aggressive policy action has left almost no overcapacity in North America, he noted.

“In Europe, if you take into account what has been done already in terms of capacity reduction and the chance of recovery in the European market, we are not going to see a balance of capacity and demand match in Europe in the foreseeable future,” he said.

Overall, Houchois said he saw only a muted upside on the industry’s prospects after five years of strong performance, noting that investors are starting to get nervous about “some of the data points turning wobbly.”

“People are worried about the Chinese car market,” he said. “There are lots of reasons to be less optimistic about autos.”